20 May 2016

The Smartest Places on Earth: brainbelts of the future


The Smartest Places on Earth: Why the Rustbelts are the Emerging Hotspots of Global Innovation. Antoine van Agtmael & Fred Bakker. Perseus Books Group, RRP £17.99

Rustbelt cities are becoming the unlikely hotspots of global innovation. At least, that’s the view according to Antoine van Agtmael, the economist who coined the term “emerging markets”, and Fred Bakker, CEO of Het Financieele (The Financial Times of Holland). These cities, which were built upon and almost wholly specialised in one industry, were subsequently ravaged by outsourcing and fell into decline. But their story is not over yet.

This book challenges the conventional wisdom that American and Northern European markets have lost their innovative, competitive edge. For several decades, these regions have been seen as on the decline, as industry was increasingly outsourced to emerging markets. The architect Rem Koolhaas even went as far as redrawing the world map of the future, placing a shrunken US on the global margin, with emerging Asian countries dominating the centre. By 2011, financial analysts were already lamenting that Europe would soon become the “museum of the world”.

But travelling around areas typically sought for outsourcing – like China and Taiwan – led the authors to some surprising discoveries. Senior businessmen and policy makers were expressing private concern about impending competition from the West. Whilst the manufacturing of parts such as chipsets for smartphones remained cheaper in Taiwan, the research and development happening back in the US was beginning to take off again. R&D had long been established in ‘old’ economies, but now a fresh energy was widening the gap between West and East once more. The concern expressed in Taiwan was that this progress in design could give the US a comparative advantage so large it could swing the pendulum back in their favour.

Could it be that the CEOs in the East have spotted a trend their counterparts in the West haven’t? Could sophisticated R&D outweigh the benefits of cheap labour?

Another discovery the authors made was the shift in working style and process. Increasingly, van Agtmael and Bakker found technology developers worked in collaborations: with universities, partners, even government agencies, but never alone. The cost of research at that level can no longer be sustained independently, nor is it feasible or desirable to have the specific expertise needed in-house full time.

The purchase of a new production site in the US by General Electric was the final piece of evidence that convinced the pair they were onto something. The facility for the production of next-generation aircraft engines would be core to GE’s business. They write “this was a compelling model, proof that major American companies were bringing some of their most important manufacturing operations back to the United States.”

The authors spent two years collecting field data, focusing on the towns of Hudson Valley (New York), Akron (Ohio), Dresden (Germany), Eindhoven (The Netherlands) and Oulu (Finland), from community colleges to big corporations to tiny start-ups. All seemed to home in on the creation of products through an open exchange of information, and the partnership of business and academia. This sharing of brainpower led van Agtmael and Bakker to coin the term “brainbelt”.

They define brainbelt as more than “a collection of entities conveniently co-located in an appealing region”, areas with “a strong sense of identity, regional pride, activities of continuous improvement, taking on complex, multidisciplinary and expensive challenges that could not be handled by any single player alone”. This all sounds utopian. But sharing is not known as typical business behaviour. How on earth did brainbelts foster sharing behaviour organically?

One reason is the mutual dependency that comes with expensive, big, complex projects – no one can do it alone. But another is that because the companies/teams are all so sharply focused, their commercial activities are unlikely to significantly overlap with those of their partners. Sharing knowledge is unlikely to create a competitive threat.

Whilst there is a notable difference in funding sources between the US and European brainbelts (the US military not only has a much larger budget, it also invests much more heavily into technology), core characteristics of all the hotspots can be identified, including:

• They are centred around a ‘connector’ that is largely responsible for establishing the ecosystem due to their energy and vision
• The focus is extremely narrow on one or a few disciplines
• They have an understanding and acknowledgement of threat – founders of a brainbelt recognise that the area has been hit before and could be again.

The sceptic would argue this still sounds idealistic. Even if the R&D were more advanced, how would it steal back the lion’s share of the market? The answer: R&D has evolved. It is no longer an enclave for intelligent people to devote their careers to fascinating lines of enquiry that don’t create value for the company. R&D must itself have commercial value. The genius of brainbelt projects is that the ‘smart’, complex products born deliver far greater value than the outdated ones, even on their higher-cost production model.

The authors liberally use the word “renaissance” throughout the book, emphasising that this is not just a nostalgic return to manufacturing in the West. There isn’t, and won’t be, much space for manual labour in the brainbelt. Further on in the book, the authors go onto to predict how robotics, 3D printing and the Internet of Things will advance smart manufacturing even further still. Automation will become affordable to smaller start-ups; customisation will be offered on an unprecedented level; and waste or scrap will be virtually eliminated.

They do note that in the short-term developing countries will struggle to close the innovation gap. However “in the longer run, it will bring benefits for the entire world by making smart products that help address challenges that affect us all.”

Where collaborative brainpower is prioritising making things smart, not cheap, it is creating a new economy that is turning the trend of globalisation on its head. After years of being on the defensive, the tide has turned. It appears that the next emerging market may, in fact, be the West.

Olivia Archdeacon is Assistant Editor of CapX.